Asset Manager Competition Is Good for Clients

In the midst of market volatility and projections of a
prolonged low-return environment, asset managers are seeking new ways to reach
institutional investment buyers, including defined contribution (DC) retirement
plans.

New research from Casey Quirk, a practice of Deloitte
Consulting LLP, suggests this trend should present tremendous opportunity for
retirement plan sponsors to take advantage of new innovations. On the flip
side, it will be more important than ever for plan sponsors to monitor the
marketplace of investment products to ensure they are still accessing top
quality offerings.

Casey Quirk projects that investment managers who do nothing
to modernize their sales and service approaches could face more than $770
billion in collective outflows through 2021. However, the firm projects that
those which transition their capabilities to serve the evolving preferences of
institutional buyers can expect to see inflows of as much as $1.5 trillion
during the same time period. This dramatic flow of capital could significantly
reshape the asset management landscape retirement plans and other institutional
investors operate in.

Casey Quirk suggests asset managers that haven’t
traditionally sought to do business in the space will increasingly seek “new”
institutional buyers such as DC plans, while significantly adapting their
offerings and sales structures to better serve clients in “this saturated,
competitive environment.”

David O’Meara, a senior DC investment consultant at Willis
Towers Watson, notes that as the retirement services industry shifts from the
defined benefit (DB) to DC model, many asset managers are finding their
products don’t exactly fit well into a DC plan sponsor’s investment menu.
Product innovation can change that. O’Meara says managers will likely venture
to create new vehicles like institutionally
priced mutual funds or collective investment trusts (CITs).

“In the case of a CIT, the operational costs are lower and so
they can operate on a more cost-effective basis which is crucial in today’s DC
environment,” O’Meara says.

NEXT: Change doesn’t come easy

Of course, this evolution won’t come easy for all asset
managers—and there is a distinct chance that new players could emerge to
challenge those that have traditionally been successful serving DB and DC
plans.

O’Meara notes that many managers today are examining the
best approaches to building target-date funds (TDFs),
which continue to dominate new flows in the DC retirement planning market.
Leading investment product manufacturers are also focused on serving the shift
to greater use of passive investments, which coincides with a growing client
focus on managing fees and increased skepticism about the long-term value of
buying active management.

Considering all of this, O’Meara says sponsors can work with
asset managers and adviser resources to “negotiate better fee terms or
encourage managers to launch vehicles with a better fee structure from the
retirement plan perspective … It’s a good opportunity for DC sponsors to
revisit their managers and the fees associated with them.”

Jeff Levi, principal at Casey Quirk, tells PLANADVISER that
overall asset managers are also responding to demographic shifts and investor
preferences for different exposures like environmental, social, governance (ESG)
parameters, which is becoming increasingly popular among Millennials, studies
suggest. Although the conversation about building lifetime income through DC
plans is still in its nascent stages, new in-plan
retirement income vehicles could also act as entry points for asset
managers looking to enter or improve their offerings in the DC space.

“Defined contribution has been designed as an asset
accumulation system and has not really transitioned into a retirement vehicle,”
O’Meara concludes. “Now, we’re starting to see retirement income solutions come
to market. It’s certainly an area that we see taking hold in the coming years.”